UIUC Econ303 Section II Labor market Chapter 4 Firm s problem demand for labor A representative firm with production function and a fixed level of capital can vary the labor input in the production In general Intermediate Macro Zhao 1 UIUC Econ303 is a profit maximizer value added price of output P and labor input W Value added Labor cost Profit measured in units of good for a firm wage relative to price of its product for aggregate economy real wage inflation adjusted wage purchasing power of monetary wage Nominal vs Real Wage Median worker Intermediate Macro Zhao 2 UIUC Econ303 and makes decisions at the margin The optimal choice of N is the one that maximizes profits feasible This is done by comparing benefits and cost at the margin Marginal cost of one more worker in units of goods is Marginal benefits of one more worker is Decision at the margin page 91 Intermediate Macro Zhao 3 UIUC Econ303 Decision at the margin page 92 The optimal choice equates the margins A profit maximizing firm hires labor to the point where For any wage we can use this condition to figure out the quantity of labor demanded by a firm Example The optimal choice is where Quantity demanded on the labor market Quantity supplied on the goods market Intermediate Macro Zhao 4 UIUC Econ303 How many workers page 93 Demand for labor is a schedule that shows the relationship between quantity demanded for labor and wages Labor demand curve Marginal product curve Demand curve is the marginal product curve Downward sloping demand curve comes from diminishing marginal product of labor Intermediate Macro Zhao 5 UIUC Econ303 A perfect elastic labor demand curve page 94 An increase of labor demand refers to a right shift of entire curve If wage stays the same firm is willing to hire more workers If firm hires the same amount of workers it is willing to pay a higher wage Anything that increases marginal product of labor increases labor demand Intermediate Macro Zhao 6 UIUC Econ303 What could lead to an increase of amount of labor hired employment An increase of quantity of labor demanded No change of MPL with a decrease of wage rate An increase of MPL while wage stays the same Movement along the demand curve Movement of the demand curve Productivity increase and employment page 95 Intermediate Macro Zhao 7 UIUC Econ303 An increase of labor demand an increase of employment Technology progress and higher wages Intermediate Macro Zhao 8 UIUC Econ303 Tensions when productivity and investment stagnate high wage low employment high wage high employment high employment low wage Intermediate Macro Zhao 9 UIUC Econ303 Percentage of job in various categories Intermediate Macro Zhao 10
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